“We are now experiencing the first truly major crisis of financial globalisation,” said the Swiss central bank governor Philipp Hildebrand this week.
“Never before have banks seen such destruction of their balance sheets in such a short time. Moreover, there are signs that the problems are spreading. The risk premiums on commercial property, consumer credit and corporate loans have risen sharply,” he said.
Debt levels have been much higher than in the Roaring Twenties; the new-fangled tools of structured credit are more opaque: the $415 trillion nexus of derivative contracts is untested. Nobody knows for sure if the counter-parties are able to deliver on vast IOUs, or whether the construct is built on sand.
What keeps Federal Reserve officials turning at night is fear that the “financial accelerator” will now set off a vicious downward spiral. There is a risk of “very adverse economic outcomes,” said Fed vice-chair Don Kohn.
Albert Edwards, global strategist at Societe Generale, said the toppling banks are merely a symptom of a deeper rot. “The banks are not the problem. Nor even the grotesquely leveraged funds. The problem is that an economic bubble financed by ridiculously loose monetary policy is unravelling,” he said.
Yep, fix one bubble with yet another more severe bubble.
Only an Ivy Tower type could come up with that idea. (Or, a brain-trust type….)
President Herbert Hoover said that what is necessary is for accesses in the system be dealt with by neccessary market adjustments and charity for one’s neighbor. (my preci’)
We will never learn because, in a Democracy, we always vote for “No Pain”, and, unfortunately, we therefore get even more pain every time.
Don
And how many more are out there that we don’t know about yet?
Straight pins wouldn’t go up you-know-whats at their audit firm about now.
I know this is serious and has deep roots, but I also sense that the Telegraph is a sensationalistic newspaper.
The British papers are more accurate in regards to describing the current dire situation of the American Economy. Most Americans do not understand or are in deep denial what is happening. The dam is cracking and leaking and the Feds are putting fingers in to stop the leaks. There are estimates that the loss could be in the trillions as much as our current national debt.
The current challenges/discord in the Episcopal Church will seem insignificant to the ecomomic crisis we are facing. Trust funds, pensions, edowment, could be swept away in a flash. With the good returns the Episcopal pension/endowments in the past years one wonders how many of our investments have been made in so-called safe securities/hedge funds. We all may soon find out!
There are multiple problems here that I can only address briefly. Media inaccuracy is greatly exacerbating the problem.
There is widespread misuse of the term “subprime”. The media wrongly conflates many elements into “the subprime crisis”. Moreover, even true subprime loans can range from 2/28 ARMs at 10% to 30-year fixed at 4.5%. Calling the current financial crisis “the subprime crisis” is like calling the American Revolution “the Concord War”.
The real problem is that the US mortgage system has frozen, except for the FNMA/FHLMC and FHA/VA sectors. To understand why you need a basic understanding of mortgage banks. Generally, they do not have depositors. Instead they have massive lines of credit from which they make loans, thereafter selling those loans into the secondary market, which pays off the lines of credit and allows them to make new loans. the cycle repeats over and over.
The current environment has created a panic that has caused the secondary market to disappear, even for AAA-quality mortgages. As a result, mortgage banks are sitting on masive amounts of solid, performing loans that no one wants to buy. In turn that means the banks cannot make new loans. The Fed attempted to inject some liquidity this week with a $200 billion debt swap.
The crisis was aggravated (some suggest even created) by Wall Street creating exotic new derivatives that cut up mortgages in different ways, rather than just packaging blocks of complete mortgages. Those derivatives have created a huge amount of uncertainty in the financial markets, because, with the onset of the initial mortgage problems, derivatives have become impossible to value in any meaningful way. (Someone once described the purported values of derivatives as “guesses based on estimates”.)
Signs of a bottom in the market are already here. Vultures area now buying good mortgages at 80-85%, giving them an instant 20-25% gain (plus interest) when the market stabilizes.
The bottom line is read all these reports with considerable caution. There is massive sensationalism and ignorance/incompetence in the media. This is a crisis, but the exact nature is badly misunderstood.
We should remember that this is an election year, and the war in Iraq is going well. (You can tell from the lack of press coverage). It is entirely possible that the “subprime crisis” is being manufactured by interests (‘cough’ the New York Times and friends ‘cough’) who’s goal is regime change.
“The real problem is that the US mortgage system has frozen, except for the FNMA/FHLMC and FHA/VA sectors. To understand why you need a basic understanding of mortgage banks. Generally, they do not have depositors. Instead they have massive lines of credit from which they make loans, thereafter selling those loans into the secondary market, which pays off the lines of credit and allows them to make new loans. the cycle repeats over and over. ”
Works just like a Ponzi scheme, no? When the buyers on the other side dry up the whole thing collapses.
As an almost complete layman on matters of high finance, I’m in no position to critique the particulars about these products and methods. I am, however, in the position to say that those who made poor and/or reckless decisions should lose money because of it, up to and including every penny they have. If there’s no pain, this will only be repeated.
One big difference, Charley. Buyers of the mortgages get something of value, and the4 vast majorioty are performing. Ponzi folks get nothing but empty promises. Apples and oranges.